The Federal Reserve has largely been a failure and it is time to replace it. That is the conclusion of a November/December 2012 Policy Report by the Cato Institute. Here is how they characterized the aim of their report:
In the aftermath of the Panic of 1907, Congress appointed a National Monetary Commission. In 1910 the Commission published a shelf-full of studies evaluating the problems of the postbellum National Banking system and exploring alternative regimes. A few years later Congress passed the Federal Reserve Act.
Today, in the aftermath of the Panic of 2007, and as the one hundredth birthday of the Federal Reserve System approaches, it seems appropriate to once again take stock of our monetary system. Has our experiment with the Federal Reserve been a success or a failure? Does the Fed’s track record during its history merit celebration, or should Congress consider replacing it with something else? Is it time for a new National Monetary Commission?
We address these questions by surveying relevant research. The broad conclusions we reach based upon that research are that the full Fed period has been characterized by more, rather than fewer, symptoms of monetary and macroeconomic instability than the decades leading to the Fed’s establishment; while the Fed’s performance has undoubtedly improved since World War II, even its postwar performance has not clearly surpassed that of its (undoubtedly flawed) predecessor; and alternative arrangements exist that might do better than the presently constituted Fed has done.
These findings do not prove that any particular alternative to the Fed would, in fact, have delivered superior outcomes: to reach such a conclusion would require a counterfactual exercise too ambitious to fall within the scope of what is intended as a preliminary survey. The findings do, however, suggest that the need for a systematic exploration of alternatives to the established monetary system, involving the necessary counterfactual exercises, is no less pressing today than it was a century ago.
Here is their conclusion:
Available research does not support the view that the Federal Reserve System has lived up to its original promise. Early in its career, it presided over both the most severe inflation and the most severe (demand induced) deflations in post—Civil War U.S. history. Since then, it has tended to err on the side of inflation, allowing the purchasing power of the U.S. dollar to deteriorate considerably. That deterioration has not been compensated for by enhanced stability of real output.
Although some early studies suggested otherwise, recent work suggests that there has been no substantial overall improvement in the volatility of real output since the end of World War II compared to before World War I. While a genuine improvement did occur during the subperiod known as the “Great Moderation,” that improvement, besides having been temporary, appears to have been due mainly to factors other than improved monetary policy. Finally, the Fed cannot be credited with having reduced the frequency of banking panics or with having wielded its last-resort lending powers responsibly. In short, the Federal Reserve System, as presently constituted, is no more worthy of being regarded as the last word in monetary management than the National Currency System it replaced almost a century ago.